Borrowing figures boost for Chancellor

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Chancellor George Osborne gained some better news on the UK's struggling public finances today after official figures showed lower than expected borrowing in May.

Public sector net borrowing came in at £16 billion, down from £17.4 billion a year earlier and well below consensus forecasts of £18 billion.

April's borrowing figures were also revised down by £1.6 billion, the Office for National Statistics (ONS) said.

The better than feared borrowing figures - helped by stronger tax receipts - are unlikely to prevent Mr Osborne from launching a fiscal squeeze in his first Budget, with a VAT hike the likely candidate.

The forecasts from the newly-created Office for Budget Responsibility (OBR) earlier this week also predicted lower borrowing - but stressed a bigger structural deficit in the public accounts, which needs to be addressed through tax hikes or slashing spending.

Last month the Government announced £6.2 billion in spending cuts and yesterday scrapped another £2 billion in schemes announced by Labour before the election.

Vicky Redwood of Capital Economics said: "The big picture, of course, is that borrowing remains extremely high and additional measures to reduce the deficit will be required in next week's Budget.

"Indeed, the Government appears keen to act sooner rather than later... We expect tax rises and spending cuts adding up to perhaps £20 billion per annum to be announced next Tuesday."

Mr Osborne will also be keen to act due to the recent turmoil across Europe amid fears of a Greek default and worries over the strength of Portugal and Spain, IHS Global Insight's Howard Archer said.

"Pressure for accelerated fiscal tightening in the UK is being maintained by countries across the Eurozone stepping up their austerity measures in reaction to the region's sovereign debt crisis."

Today's data on the UK's recession-ravaged finances still showed spending running well ahead of receipts. Total current receipts of £34.7 billion during May were up £2.5 billion on a year earlier but still dwarfed by current spending of £50.9 billion over the month.

The UK's net debt stood at £903 billion - up from £774 billion a year earlier - the equivalent of 62.2% of the UK's entire annual economic output.